Question:

What is the year-end adjustment?

Answer:

Year-end adjustments are income tax adjustments that payers make each December or January for executives and employees.

In Japan, Income Tax Law provides that the salary payer (a sole proprietor or a company) has to withhold income tax from salary of employee/director. However, monthly payroll calculation is made using the tentative number of dependents and estimated amount of annual salary income. The withheld tax amount is often different from final annual income tax to be paid. In addition, tax might be decreased if the employee/director has paid certain life insurance premiums, earthquake insurance premiums, etc.

Salary payer is required to make an adjustment of income tax with the last salary calculation of the year, i.e. in December, it is called Nenmatsu-chosei. It can also be performed with the first salary calculation of the following year, instead of December salary. After the adjustment, the salary payer issues a certificate of income and withholding tax (Gensen-choshu-hyo) to each employee/director.

The process of adjustment above is not applied to individuals who have annual salary of over JPY 20 million, since they have to file the income tax return by themselves.